BY SANDRA GUY BUSINESS REPORTER

Sears, Roebuck and Co.'s worsening credit-card problems shot the company's credibility and sent its shares to a 12-year low Thursday.

The retailer--already reeling from a yearlong slump in store sales and struggling to reinvent itself--announced a stunning 26 percent drop in third-quarter profit and a warning of lower full-year 2002 profits because it had uncovered more future uncollectible credit-card debt since firing the head of the credit-card business two weeks ago.

Sears said it must set aside an additional $150 million to cover future uncollectible debts, in addition to the $100 million in extra bad-debt reserves it announced 10 days ago. For the third quarter, Sears increased its allowance for future uncollectible debts by $189 million, and charge-offs for uncollectible accounts increased $33 million.

Financial analysts who gathered for a regularly scheduled meeting at Sears' headquarters in Hoffman Estates on Thursday said they were confused about how CEO Alan Lacy could have missed the growing problem, particularly since Sears' credit business accounts for more than 60 percent of the retailer's operating income.

Analysts remember that Lacy was the man in charge of straightening out Sears' credit-card mess in the 1990s. That's when Sears pleaded guilty to one criminal count of bankruptcy fraud and took a pre-tax charge of $475 million to swallow the costs of a scandal in which the company wrongfully pressured bankrupt credit-card holders to repay debts.

Lacy took pains to explain that today's controversy differs from the earlier scandal, primarily because Sears has been aggressively switching its better customers from the Sears card to the new Sears Gold Mastercard, which has a lower interest rate than its in-store charge card and can also be used at other merchants. That enables the retailer to collect more fees when customers use the cards elsewhere.

Because of the problems, however, Sears will tighten restrictions on who can qualify for the Mastercard and will tighten offers of convenience checks and balance transfers to encourage customers to switch. That's where much of the projected delinquencies came to light, said Sears spokesman Bill Masterson.

Lacy said he fired Kevin Keleghan, former credit and finance group president, because Keleghan "was not being forthcoming" about the problems the credit business faced, and Lacy lost confidence in Keleghan's credibility.

Lacy revealed Thursday that another credit official, whom Sears officials identified as Vish Vishwanath, was fired Wednesday as vice president of risk management and credit analytics because he, too, withheld information.

However, Lacy said his investigation indicated Sears had engaged in no unethical activity and had filed no wrongful financial disclosures or reports with the U.S. Securities and Exchange Commission.

Nevertheless, one analyst Thursday said he saw a parallel with Enron's lack of credibility. Michael Markowski, director of research at StockDiagnostics.com, said Sears generated negative operating cash flow for the first half of 2002 and announced record profits for its second quarter, as did Enron in 2001. Also, Markowski suspects Sears' record profits are coming from credit-card holders' late fees. Markowski recommends the SEC institute an accounting policy that would prohibit companies from reporting late fees as profit until cardholders actually pay the fees.

Sears' credit card problem became public Oct. 2, when the SEC forced Sears to restate the timing and manner of its $300 million pre-tax increase in future uncollectible credit-card accounts.

Roman L. Weil, an accounting professor at the University of Chicago Graduate School of Business, said of the SEC's action, "Did Sears break the rules? No. Did Sears know it was skating close to the line? Undoubtedly. Will Sears admit it? Of course not."

Howard Davidowitz, president of retail consulting firm Davidowitz & Associates, told CNN/Money he believed the SEC should look into the matter. An SEC spokeswoman said Thursday the commission would not comment on specific companies.

Just 10 days ago, Lacy said Sears would earn a lower-than-expected 80 to 82 cents a share in the third quarter. On Thursday, he announced the real number--53 cents per share, a surprising 34 percent plunge, and a 26 percent drop from year-earlier earnings.

Sears reduced its full-year forecast for profit excluding some costs to $4.86 a share, from the $5.15 a share estimate it endorsed last week. Third-quarter net income dropped to $189 million, or 59 cents a share, from $262 million, or 80 cents, in the year-earlier period. Revenue fell less than 1 percent to $9.67 billion, the second consecutive quarterly decline.

Sears said it began seeing signs of deteriorating credit quality in September. Its lagged charge-off rate, or the annualized ratio of current losses to credit card loans booked one year ago, was 6.11 percent in the third quarter, up from 5.76 percent in the same period a year earlier, Masterson said. Analysts use lagged rates to normalize losses distorted by rapid growth.

The average number of days of Sears' accounts receivable increased to 242 in the second quarter from 204 in the year-earlier period.

Sears has about 60 million cardholders, including 22 million Gold MasterCard users, as of July. Sears bought Internet and catalog retailer Lands' End, and began selling its new Covington apparel line last month to boost clothing sales. The company will delay the introduction of Lands' End items in its stores for two weeks because of the shutdown of West Coast ports earlier this month, Lacy said.

The retailer expects sales to continue to fall for the rest of the year as it eliminates some other brands and remodels stores, disrupting shoppers. Shares fell $10.80 to close at $23.15 in heavy trading on the New York Stock Exchange--their lowest level since October 1990.

Confronted with the surprise earnings revisions, analysts at the meeting scratched out new estimates on napkins and scrap paper to calculate just how low Sears stock might trade.

The plunge Thursday left the stock at a mere 7.9 times what had been the First Call consensus on Sears' 2003 earnings estimate. It traded as high as $59.90 in June. One analyst reckoned that Sears stock could be halved again, leaving the stock at about 5 times projected earnings.
Contributing: Bloomberg News, AP